Two important unanswered questions about the gold monetization scheme

The first question is of course about the interest rate, and how much will a bank be willing to give out to investors.

As far as retail investors are concerned I feel it is really hard to get excitement going about the gold monetization scheme at anything less than 3 or 4 percent. I have a feeling it might be feasible to get to a rate like this or even slightly higher than this since banks are allowed the gold reserves as part of their CRR / SLR reserves, and there may be a market for them to lend this gold and make a profit.

Pot of Gold
Gold Monetization Scheme

The second question, and one that has not been discussed as much is the paper-work that will be required when you take your gold to get it melted. Do you need any paper work at all to show that was bought in white or can you take any gold at all? This is obviously important because of the realities of our economy.

A lot of gold is bought in cash, and through money on which tax hasn’t been paid. When you talk about black money you tend to think of crores of rupees locked up in Swiss accounts but any retailer or professional who has under-reported his income and not paid tax on all of it has black money and they are not necessarily cheats or corrupt officials, they have just found ways around our tax system which isn’t good at enforcement when it comes to anyone outside of salaried employees.

Most commonly such money finds its way to gold and real estate, and if the government is introducing a scheme which looks at channeling gold into the economy and all above board, it is important to take cognizance of this reality and not be insistent on asking for paperwork when someone wants their gold melted as part of this scheme.

Yash Birla has a Swiss Account, what next?

PTI reported today that industrialist Yash Birla, along with four other lesser known businessmen hold Swiss bank accounts as confirmed by the Switzerland authorities.

This news apparently delighted the finance minister who chalked this to successful diplomacy and cooperation between the Modi government and the Swiss government.

Almost all news articles I read talked about Yash Birla as if he were guilty already, and I was unsure as to what the charges were.

It seemed at first that holding a Swiss account that wasn’t disclosed to the Indian IT authorities is what these individuals did wrong, but if that were the case then I wasn’t sure why the Swiss decided to release these five names only. Surely, a lot more than five Indians hold Swiss accounts. Also interesting is the timing of the release because the Indian government does complete a year today, and this timing is rather perfect for them.

Deutsche Welle which is an international German newspaper also reported the story, and had a little more breadth to their reporting because of the international angle that the Indian papers lacked.

DW reports the following:

Switzerland has begun online publication of names of foreigners and foreign firms wanted in tax probes by their countries of origin, including Germany. American citizens are identified only by their initials.

So, from this piece of information you can gleam out that the reason why these names are published is that the Indian authorities have specifically asked for certain individual names from the Swiss stating that the Indian government is investigating these individuals for tax frauds.

The second big question is why the Indian government asked about some individuals specifically, and the article refers to names from the stolen list that became popular some time ago.

So, to that effect these names were present in a list of people who used to have Swiss accounts at one point in time, and now that the Swiss Authorities have confirmed that these people did in fact have Swiss Accounts at one point or the other — I imagine the Indian authorities will encourage these individuals to voluntary declare their incomes under the new Black Money Act and pay the fines per the new regulations.

I assume that Indian authorities will do that because there is still a very long way to go for India to actually get any details of how much money is there in these Swiss accounts or in fact if there is any money at all present there.

Would the people named in the stolen list have done nothing during this time?

And if there is no balance there presently, will the Swiss be willing to share where that money went? I wouldn’t bet my money on that.

I would like to see how this progresses and in fact if the IT department is able to do anything with just this confirmation since it doesn’t actually tell you the amount of money in the account, and I can’t imagine much being done without that information.

Also, if you haven’t read about this at all yet, this is a good article that will catch you up with the parts I assumed you have read already.

Update: An official spokesperson of Yash Birla Group has said that Yash Birla has no individual bank account in his name or in his control.

What is the definition of a heat wave and how do people die of it?

The heat has been particularly merciless in the last few days, and the reports of hundreds of people dying due to the heat wave is quite saddening.

Unfortunately, this is nothing new; every year people die of the heat wave in the summers, and of the cold wave in the winters.

In the winters there are visible efforts to protect people from the cold wave with the government setting up shelters and NGOs pitching in as well, and whatever the shortcomings of these efforts, one can only imagine that the fatalities would be a lot higher if nothing were done.

However, the efforts to protect people from the heat wave aren’t as apparent and it made me wonder who decides when a heat wave is caused and how do people actually die of it?

How is heat wave defined in India?

The answer to the first question is clear — heat wave in India is defined by the Indian Meteorological Department, and this definition can be found in the website of the National Disaster Management Authority.

The Indian Meteorological Department (IMD) has given the following criteria for Heat Waves:

  • Heat Wave need not be considered till maximum temperature of a station reaches atleast 40*C for Plains and atleast 30*C for Hilly regions
  • When normal maximum temperature of a station is less than or equal to 40*C Heat Wave Departure from normal is 5*C to 6*C Severe Heat Wave Departure from normal is 7*C or more
  • When normal maximum temperature of a station is more than 40*C Heat Wave Departure from normal is 4*C to 5*C Severe Heat Wave Departure from normal is 6*C or more
  • When actual maximum temperature remains 45*C or more irrespective of normal maximum temperature, heat waves should be declared. Higher daily peak temperatures and longer, more intense heat waves are becomingly increasingly frequent globally due to climate change. India too is feeling the impact of climate change in terms of increased instances of heat waves which are more intense in nature with each passing year, and have a devastating impact on human health thereby increasing the number of heat wave casualties.

The second question: How do people actually die of the heat wave should be very easy to answer, but I didn’t find a very convincing answer to it.

While state officials report how many people died of heat in their states, it is not clear what their source of information is and how they categorize a death as a death due to a heat wave. One would imagine this is important if you had any hope of fighting such deaths.

However, from what I read — the two most probable causes of deaths due to heat waves are homelessness and laborers getting sunstroke in the heat.

Interestingly enough, Telangana and Andhra Pradesh which have seen the majority of these heat wave related deaths have rescheduled government services like the NREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) because the heat is causing sun stroke among the laborers working under the scheme. It is not clear how many people have died due to this but if the number is significant enough to reschedule the scheme then this should act as a lesson for the future as well as for other states as well and there ought to be some rules that stop people from working under such schemes when the temperature goes beyond a certain level.

Homelessness seems to be the other prominent cause of deaths and while there are no official reports that I could find of them this year, there are reports from previous years that mention Delhi Police statistics on unidentified bodies they find of homeless people and the most probable cause of their death does seem to be the heat.

The temperatures are changing permanently, and it is reported that the heat wave so far has claimed about 445 lives in Andhra Pradesh and Telangana which are the worst hit states. There is urgent need to take this issue seriously, and understand the causes, and potential actions that can be taken to save lives in the future.

Details of the Draft Gold Monetization Scheme

The Finance Ministry published a draft on the Gold Monetization Scheme that the finance minister had spoken about during the recent budget.

The big idea behind gold monetization is that India produces almost no gold and imports massive amounts of it — up to a thousand tons a year — this leads to a big trade deficit, and if there were some way to channelize the idle gold lying with households and temples etc. that would go a long way in helping this hole.

The idea is definitely very good, and I’m sure all of us have jokingly discussed this at one point or the other. The difficulty lies, as it always lies, with the execution.

To that extent, I think the ministry has come out with a good first draft although I think right now this idea is more beneficial to temples etc. than it is to households.

I say that because in order to put your gold to work you have to agree to have it melted, and in general you won’t find many households who are willing to have their gold melted even if it promised them an interest. The interest is not likely to be very high for these schemes, and at one or two percent per year, I just don’t see many families doing that.

Religious institutions however are a different kettle of fish altogether, and I do believe that a lot of them will eventually take a pragmatic stance on this, and monetize their gold. Eventually is the key word here because this has never been tried before and it will take time to gain acceptance of the idea. Most readers will remember the skepticism surrounding gold ETFs in the early days, but now it finds its way in the portfolio of most investors.

For those who are willing to have their gold melted, here is a brief overview of how the process is going to work.

  1. You take your gold to a purity testing center and they will tell you how much pure gold there is in your ornament.
  2. If you agree to go forward, your jewellery will be stripped off studs etc. – anything which is not gold, and then melted down to pure gold.
  3. Now they tell you the purity and weight a second time, and you can either accept that and deposit your gold, or take back the melted bars.
  4. If you accept it and deposit the gold then you will be given a certificate of the purity and quantity of the gold and no fee will be charged for melting. In this case the bank pays the melting fees. You don’t get your gold back in this case.
  5. Next, you take this gold certificate to a bank and they open a Gold Savings Account for you.
  6. Bank pays you interest as well as principal in gold.
  7. You live happily ever after.

The government is going to exempt the interest income as well as any gains in principal from Wealth Tax, Capital Gains as well as Income Tax. So, to that extent, the tax angle on this is extremely good.

The process described in the draft document shows that it will take you about a couple of days to do this and the cost will be about a thousand rupees or so. Right now, there aren’t those many centers and of course you have to wait and see how many banks open this kind of account. The other big variable is the interest rate, and how much interest can the bank really gives out on these type of deposits.

I don’t think this scheme is going to be very popular with households in its current form, not unless the rate of interest is very appealing, but I do believe it is a great first step in what could really put to work tons of gold lying idle in India’s religious institutions.

Thoughts on the India – China MOUs

The China pitstop has perhaps been the most interesting in our globe trotting PM’s itinerary. The beginning wasn’t as exciting for its substance as it was for its selfie opportunities, and even though a couple dozen government to government MOUs were announced, it is hard to get excited about an agreement between Doordarshan and China Central Television Corporation or even a yoga college in China.

The primary criticism I saw of these MOUs was that these were nothing more than a framework to do something sometime in the future, and most of them don’t translate into anything tangible, and it does seem that this criticism is fair.

Another criticism has been the lack of progress made on difficult issues like border disputes, China flexing its muscle in the Indian Ocean, stapling visas on residents of Arunachal Pradesh, building roads in POK and I believe nothing revealed in public gives any reason to think that China is rethinking any of its moves in those directions.

Finally,  the issue of India’s increasing trade deficit with China which is to the tune of $38 billion dollars last year was also brought up but this is one area where I think talks are not going to help much. The trade deficit exists because there is an imbalance in the manufacturing capabilities of the two countries, and China is much better at manufacturing than India, and as long as that remains true there will be an imbalance. This is a problem whose solution lies inwards, not external.

There was however one tangible piece of action, and that was with the announcement of the commercial contracts which are estimated to be around $22 billion and are to be executed between Indian and Chinese companies.

They have substance, and the list of the MOUs shows that they include varied companies and sectors, and I feel that this is a very good outcome for the visit.

The most interesting aspect of this investment is that it is of a somewhat equal nature unlike most other big announcements that come out of China.

I say equal to mean that this is not simply the case of Chinese companies building infrastructure in a foreign country which is usually how these things are but rather a mix of investments from Indian companies in China like Wipro or Infosys, investments from Chinese companies in India in partnership with Indian companies like the solar power co-operation between Welspun and Trina Solar, and financing deals like the one Bharti got from China Development Bank.

Contrast this to the $46 billion investment that China pledged to Pakistan recently to build infrastructure in that country, or the $50 billion China recently announced to spend in Brazil and the difference is clear.

To take the Brazilian example, look at this excerpt from the BBC article about this. 

China is planning to invest up to $50bn (£32bn) in Brazil for new infrastructure projects.

The deal is due to be signed by banks from both countries during a visit by Chinese Prime Minister Li Keqiang to Brazil next week.

The money will go towards building a railway link from Brazil’s Atlantic coast to the Pacific coast of Peru to reduce the cost of exports to China.

I believe the deals that Indian companies have signed are a positive outcome, and should translate into meaningful progress in the next few years. The scale is big enough to make a difference, and the nature of these transactions are such that they keep India on an equal footing with China with respect to these deals.

Can the Black Money Bill affect you directly?

Rajya Sabha cleared the Black Money Bill today, which is officially Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, and this is perhaps the only piece of legislation which the Congress finds itself unable to oppose.

The finance minister had first talked about this Bill earlier in the year, and the bill has been introduced to bring back black money stashed overseas and to that extent you don’t normally think a regular white collar workers with all their money in white will have any direct impact by it.

The draft itself talks about an exemption up to a limit of Rs. 5 lakhs in reporting foreign assets or money, but that is not very much money, and a lot of people who may have worked abroad for any length of time may have a lot more than that on which taxes have been paid in the foreign country.

The existing income tax laws require you to disclose your foreign assets and income in your tax filing but that is recent change and something that has not been really enforced yet. The IT form itself has space to make this disclosure, but not many people have been doing it.


Photo: Tax Credits

This is pertinent because there is no clear definition of ‘undisclosed income’ and while the intent of this bill is not the small fish, I think you can easily interpret undisclosed income to mean money in your foreign accounts that have not been declared in Indian IT forms.

This issue was raised by the opposition and a clarification was given on it by the finance minister, who said the following:

“we don’t want to proceed against trivial violations. But then the big fish must not get away in the garb. “Let us not fire from the shoulders of these innocent students in order to make sure that no harsh action is taken on the big fish itself.”

I believe I’m not alone in my fears of harrassment as there have been reports that corporates have also expressed these same fears.

However, there have been amendments to the original bill which are not public as far as I know that do safeguard companies and individuals against such harrassment. Specifically, Livemint reported these things that I think are very important: 

The government also approved amending the bill to curb tax evasion within India at a cabinet meeting held on Wednesday…

…Students and non-resident Indians and professionals working abroad will not be covered under the black money bill. “Only resident tax payers who are liable for assessment under income-tax act and those who spend more than 182 days in India will be under the ambit of the bill,” he said.

When the Act is available, I will read it and do a follow up post, but as of today, it doesn’t seem like there is a real threat that the Black Money Bill can be used for harrassment of regular folks.

What is the BRICS Bank that K V Kamath just became the president of?

Mr. K V Kamath was named the first head of the BRICS Bank or officially the New Development Bank today, and the news was all over today with much excitement and pride (a little misplaced in my opinion).

First, a little history on the acronym BRICS, and then a little history on the bank itself.


BRICS leaders in Brazil” by Licensed under CC BY 3.0 via Wikimedia Commons.

The acronym BRICs was coined at the investment bank Goldman Sachs in 2003, and the governments of the BRIC countries had nothing to do with it. Mr. Jim O’Neil was the person who coined the term, and in fact he coined another term: MINTs (Mexico, Indonesia, Nigeria and Turkey) , which never became as popular as the first one.

Notice the small ‘s’ in MINTs – BRICs also had a small ‘s’ in the beginning, and it is only later that people started associating South Africa with the BRIC acronym, and now that there is a bank with actual capital – it is fair to say that the ‘s’ can be ‘S’.

Now BRICs is BRICS and the governments of these five countries decided to establish a bank with a capital of $50 billion that each country will contribute equally and this bank will invest in infrastructure projects in the respective countries.

The bank will also also provide an alternative to IMF and World Bank when cash is needed by these countries or in fact other countries who can apply to it. This is interesting and slightly different in funding because the fund for this is a $100 billion funded 41% by China, 18% by Russia, India and Brazil, and the final 5% from South Africa.

This is a great step, and I hope that it becomes successful – why is the pride misplaced then? Simply because the first president had to be an Indian; that much was negotiated months ago, as was the fact that Shanghai will be the headquarters, a Brazilian will be the head of the Board of Directors, and a Russian will be the head of Board of Governors. Notice how all of those are rotating positions but the headquarters are not.

Again, I think the bank is a great idea in itself, and if it becomes successful that will be a major win for the countries involved as well as any smaller countries that may get help from it, but I think sometimes we get carried away with symbolism more than substance, and that’s what’s happening today with the appointment of Mr. K V Kamath.


What is full convertibility of the Rupee?

The RBI Governor, Dr. Raghuram Rajan has brought up the subject of full convertibility of Rupee again recently, and it will be interesting to see what steps he takes to make it happen in the future.

Capital account convertibility of the Rupee means the ability to convert INR into any foreign currency, and the foreign currency back to the Rupee at any time without any restriction on the amount at the market rates.

The obvious benefit of capital account convertibility is that it makes it easier for foreign investors to invest in your country as currency movement has no barriers, and they are assured that they will be able to take their money back to their country when the need  is warranted.


The big drawback is that if a large number of investors decide to take out their money from the country at the same time then the local currency crashes. This is what happened in the Asian financial crisis when the currencies of Indonesia, Thailand and South Korea took a big hit, and needed support from the IMF to rescue them.

India has taken steady steps to full convertibility, and steps aimed at NRIs are the most visible with a lot of concessions made in the NRE and NRO accounts in the recent past.

Although full convertibility is sometimes given a shade of nationalistic pride by the media, and since only a handful of countries in the world have currencies that are fully convertible (most of them advanced economies), perhaps it is a matter of pride, but more importantly, it is the ability to access deep capital markets that can be used for investing into infrastructure or other projects that makes full capital account convertibility a desirable thing.

The other big benefit is the ability to settle India’s trade in INR as opposed to a foreign currency which is how almost all of it is done today.

I feel that full convertibility is not a ‘short number of years’ away as the RBI governor stated some time ago, but more likely many number of years away because of the situation the Indian economy is currently in, and in general the power it gives foreign investors over your exchange rate. Even our much bigger neighbor hasn’t been able to adapt a fully convertible Yuan despite their impressive reserves, and much better economic indicators.

Image Source

How do you get anything done?

Reading and writing about the land acquisition bill has made me somewhat gloomy, and question how you can get anything done in a Democracy like India? Congress is intent on blind opposition to whatever the government proposes instead of educated debate, and since the government doesn’t have enough seats in the Rajya Sabha, it can’t pass any bill on its own.

That may just be a good thing too because had they been able to pass any bills on its own they would most likely pass certain bills that are not really in the best interest of everyone but just the vote bank that they cater to.

In this environment then, how do you get anything done?

I was reminded of the US government shutdown in 2013 when I was thinking about this. The US has these constitutional limits on borrowing that they have and once you reach the limit, the government can’t borrow anymore and since the government is financing itself through borrowings, once the limit hits, they aren’t able to pay their bills which most importantly include salaries of government employees.

This is an artificial limit in the sense that the US is not borrowing from another country but from its own Federal Reserve so in a way the amount that it can borrow is unlimited. The shutdown came into effect because the opposition party there – the Republicans vehemently opposed what’s commonly known as Obamacare, and wanted the Democrats to make cuts that would make Obamacare defunded and more or less untenable.

The Democrats and the Republicans went into a standoff and common Americans sufferred. Ultimately a deal was reached, and the limit was raised, but it was not after a lot of damage was done.

At the end of it people viewed the Republican party negatively in this face off and put a big part of the blame on them for the shutdown that took place.

I think Indians can take heart from that situation because ultimately if the Modi government’s efforts are thwarted by the Congress just for the sake of opposition, and the people take note of it and protest, they will have to withdraw such opposition.

The power of the people is what counts and recent examples like Net Neutrality and repealing Section 66 has shown that the voice of people now more than ever is heard and is more powerful than ever in this country.

Do States have large amounts of unused land already?

I wrote about some of the sticking points in the Land Acquisition Amendment yesterday, and a related question to that is of course how important is this act itself? Is it really stopping progress? Don’t state governments already have large land banks that they aren’t able to use?

I think it is important to first accept that even if all states had large tracts of land that were unutilized, you still need a good Land Acquistion Act because private companies and public enterprises will continue to acquire lands in the future, and it is necessary to have a mechanism in place for farmers, and others to be able to protest and stop such acquisitions where they are not satisfied  with the compensation given to them. Otherwise, you end up in a situation where the governments are buying people’s ancestral lands much against their wishes.

At the same time you must ensure a framework that allows private companies to acquire lands in a reasonable fashion because in some cases the current unused land may simply be unattractive. In other words, they will continue to acquire lands because the current ones may not be in a place where infrastructure or labor force is available. These lands may have initially been acquired with a politically motivated intent of ‘development’ of backward classes which is what HT reported to be the case in UP.

Or in the case of Maharashtra, the state has a policy to buy land throughout the state but not all locations are equal and it is inevitable that some areas have land which is unused whereas others have demand for land where no land can be allocated.

O Unused Land, Where Art Thou?

There are two prominent news stories that talk about unused land. The first one is the report by HT that I linked earlier, and the second one by DNA that pretty much talks about the same states, and report that some states have large tracts of unused land. However, they don’t break down the numbers and simply state that according to documents obtained by them 30 – 50 percent land is unused. This is not very tangible information, and while it makes for a good headline it doesn’t do much beyond that.

The HT story goes into numbers and says that there are 21,000 hectares of unused land in MP, 15,000 hectares in Maharashtra, 4,000 in Tamil Nadu and 329 hectares in West Bengal. It doesn’t give a break up on any other states except for Gujarat where it says that most of the land acquired has actually been allotted and there is only 500 hectares of unused land in the state.

It is not hard to see why Gujarat is doing well; because the state is doing well in providing infrastructure and other services that are necessary to set up a business in the land of course.

As far as I can see, the argument that there are vast tracts of unused lands already available does not hold water based on the information we have available right now.